With a $101.33 billion market cap, Starbucks Corporation (SBUX) is the largest coffee chain in the world. The company operates through three segments: North America; International; and Channel Development. In addition, SBUX has an ISS Governance QualityScore of 1, indicating low governance risk.
On April 4, SBUX founder Howard Schultz was appointed as the interim CEO of the company and as a Director on the board. Following his reappointment, he said, “I am returning to the company to work with all of you to design our next Starbucks — an evolution of our company deep with purpose, where we each have agency and where we work together to create a positive impact in the world … Our vision is to once again reimagine a first-of-a-kind for-purpose company in which the value we create for each of us as partners, for each of us as customers, for our communities, for the planet, for shareholders — comes because our company is designed to share success with each of us and for the collective success of all our stakeholders.”
One of the first steps taken by Schultz since his reappointment was the suspension of the $20 billion share repurchase program. This, coupled with a bleak earnings growth outlook, caused investors to adopt a bearish outlook regarding SBUX. The stock has declined 29% year-to-date.
Here’s what could shape SBUX’s performance in the near term:
Disappointing Financials
SBUX’s total net revenues increased 19.3% year-over-year to $8.05 billion in the fiscal 2022 first quarter ended January 2, 2022. Operating income came in at $1.78 billion, up 28.9% from the same period last year. Earnings before income taxes (EBT) and net income rose 31.4% and 31.1% year-over-year to $1.06 billion and $815.90 million, respectively. Non-GAAP EPS came in at $0.72, 9.5% lower than the consensus estimate of $0.80.
Cash dividends declared per share stood at $0.49, down 45.6% from the year-ago value. International comparable-store sales fell 3% year-over-year over this period. Also, the non-GAAP operating margin decreased 30 basis points from the same period last year to 15.1%.
Higher-than-expected inflationary pressures and increased operating costs due to the Omicron COVID-19 variant and tight labor market caused the company to miss the consensus EPS estimate during this quarter.
Mixed Growth Prospects
Analysts expect SBUX’s revenues to rise 14.2% year-over-year to $7.61 billion in the fiscal 2022 second quarter (ended March). However, the consensus EPS estimate of $0.61 for the about-to-be-reported quarter indicates a 1.8% decline from last year. Moreover, Street expects SBUX’s revenues to rise 13.3% from the prior-year quarter to $8.49 billion in the fiscal third quarter, but EPS to decline 1.6% year-over-year in the same period.
Nonetheless, the company’s revenue and EPS are expected to improve 12.7% and 2.7% year-over-year to $32.75 billion and $3.33, respectively, in fiscal 2022 (ending September). The consensus revenue and EPS estimate of $35.72 billion and $3.89 for fiscal 2023 indicates a 9.1% and 16.8% increase year-over-year, respectively.
Consensus Rating and Price Target Indicate Potential Upside
Of the 22 Wall Street analysts that rated the stock, 13 rated it Buy, while nine rated it Hold. The 12-month median price target of $112.95 indicates a 37% potential upside. The price targets range from a low of $91.00 to a high of $135.00.
POWR Ratings Reflect Uncertainty
SBUX has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a grade of C for Momentum and Value. It is currently trading above its 200-day moving average of $107.76 but below its 50-day moving average of $90.55, in sync with the Momentum grade. In addition, SBUX is currently trading 2.92 times its forward sales, 223.1% higher than the industry average of 0.90x. However, its trailing-12-month PEG multiple of 0.04 is 63.8% lower than the industry average of 0.11, justifying the Value grade.
Of the 44 stocks in the B-rated Restaurants industry, SBUX is ranked #16.
Beyond what I’ve stated above, view SBUX ratings for Growth, Sentiment, Stability, and Quality here.
Bottom Line
Despite being one of the largest restaurant chains globally, the company is still susceptible to continued macroeconomic headwinds. Given the skyrocketing inflation rates and rising COVID-19 cases in various parts of the country, analysts expect SBUX’s profit margins to take a hit in the upcoming quarters. Thus, investors should wait until the global economy stabilizes before investing in the stock.
How Does Starbucks (SBUX) Stack Up Against its Peers?
While SBUX has a C rating in our proprietary rating system, one might want to consider looking at its restaurant industry peers, Good Times Restaurants Inc. (GTIM), Nathan’s Famous, Inc. (NATH), and The ONE Group Hospitality, Inc. (STKS), which have an A (Strong Buy) rating.
SBUX shares rose $0.03 (+0.04%) in after-hours trading Friday. Year-to-date, SBUX has declined -29.95%, versus a -5.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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